Tax Saving Strategy: Personal Residence Exclusion for Married Couples

This tax saving strategy clears up confusion for recently married spouses who each previously owned a residence. Current law allows a $250,000 (single) and $500,000 (married) exclusion of gain on the sale of a personal residence if certain requirements are met, meaning that the couple does not pay taxes on these amounts.

The requirements are:

Ownership: One or both of the spouses must have owned the residence for two of the last five years
Use: The residence must have been the principal residence for at least two of the last five years
Frequency limitation: Neither spouse excluded gain from the sale of another residence during the two-year period ending on the date of sale

So what happens if two singles each owning a residence marry, sell each of their residences, and jointly purchase a third residence?

It depends on the filing status in the year the residence is sold. If they sell their residences before they marry and each of them meet the above requirements they could each exclude up to $250,000.

If one or both of the residences are sold after they marry, the exclusion would still apply. However, the exclusion would be limited to $250,000 per sale, even though it’s a joint tax return. The requirement limiting the exclusion to only one sale every two years does not prevent a married couple from filing a joint tax return, with each excluding up to $250,000 as long as each spouse would be permitted to exclude up to $250,000 of gain if they had filed separate returns.

Please contact BSSF if you have questions by calling 717.761.7171 (Camp Hill office), or 717.581.1040 (Lancaster office). 

Source: irs.gov
IRS Publication 523
IRC Section 121(d)(1)
Treasury Reg. 1.121-2(a)(3)(ii)

CIRCULAR 230 DISCLOSURE:  Any tax advice contained in this document (including any attachments) is not intended or written to be used to avoid any penalty imposed by a taxing authority and nothing contained herein may be used by you or any other person for that purpose.


ABOUT THE AUTHOR

Melvin A. Phillips, CPA

Principal

Mel is a Principal with Brown Schultz Sheridan & Fritz and is an integral part of the Firm’s Tax Department. He received his Bachelor of Business Administration degree with honors from Pennsylvania State University and earned a Certificate of Achievement in Estate Planning.